LEITAX CASE ANALYSIS:
Digital camera market has enjoyed tremendous growth since it was introduced in the photographic industry. Starting in 1998, price has been falling rapidly. In addition, the development of CMOS allowed digital camera to not only capture professional market, but also enter consumer market. It was estimated that in 2006 forecast would peak with 63% penetration rate for digital cameras in the US. After 2006, the growth rate was expected to fall negative.
Product lives for digital cameras had been shortened. While an average life was between 17 and 22 months, high-end, feature packed products had the shortest life cycle. However, the manufacturing lead-time for digital cameras was long. Taking Leitax for example, its manufacturing lead-time was beyond 13 weeks. Therefore it was very important to have an accurate forecast to avoid costs of write-off and obsolescence and loss of sales.
The growth saturation has brought supply chain challenges to Leitex. The maturing of digital market also meant more product launches and more overlap features of products to be managed. It became harder to achieve accurate forecast. In addition, having expeditious demand and production planning, flexible upside and downside supply, and achieving few holding inventories were more vital as errors can impact financial performance severely and lose its customers.
By the end of 2002, Leitax had bared huge loss through inaccurate forecasts and poor planning of three models. One model was delayed, one model was out of stock, and the third one was having sluggish sales. It was estimated that the cost of delay, the lost sales and excess and obsolescence costs accumulated to $26.5 million.
However the maturing market also brought Leitax an opportunity. With technology development, cost of digital market production was decreasing. While there were more products in the market, many of them could be close substitute of each other. While every company in the industry faced the same supply chain challenges, If Leitax successfully could manage its supply chain efficiency, it could expand its market share by capturing sales of competitors' products.
Traditional forecasting was ill defined. The sales group made forecast on new product introduction and midlife product replenishment, the operations group used the forecast to drive its supply chain, the finance group evaluated the forecast to see if they can meet financial plans and urged adjustment if needed. However these functional groups could manipulate forecasts based on their own incentives and interests. The three key actors in the forecasting process had conflicting goals: the sales group's incentive was on commission on sell-in to the resellers; the operation group wanted the most stable and desirable forecast because it was easier to manage; the finance group wanted to meet expectations on financial targets such as revenue and profitability. Not only these forecasts had large discrepancies, the biases and ignorance of real market information each group had significantly reduced forecasting accuracy.
As an outcome of inaccurate forecast, supplies mismatched market demand, resulted in loss of sales, and inefficient and disorganized supply chain operations. Due to ill-defined and inaccurate forecast, Leitax experienced huge financial loss in 2002. As introduced previously, he delay of a model resulted in lost sales, the opportunity cost of warehousing management and arranged capitals that was waiting for the launch that summed up to $19.5 million. The stock out on the second model reduced gross margin for about $4.5 million. The obsolescence costs on the last model was about $2.5 million. No matter how sounding the financial strategy was, if its forecast was not accurate, an enterprise like Leitax would have difficulty in achieving it financial targets, or would even fail to survive.
Therefore, it is an urgent demand to have a consensus...
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